The Top 3 Reasons You Should Refinance Your Mortgage
By HowStuffWorks Staff | September 9, 2019
Buying a house is incredibly exciting, but it does come with a huge responsibility: a mortgage. Whether you got the mortgage you’d hoped for or a less-than-ideal loan, your home mortgage puts a lot of financial pressure on you and your bank account.
However, you can always change your mortgage. With mortgage refinancing options, you can replace your current loan with an entirely new one – one with new terms and different interest.
And refinancing can potentially lower the amount of money you have to pay. If you’re thinking about refinancing your mortgage, here are the top reasons you’d want to do so.
One of the most beneficial reasons to refinance your mortgage is the potential to save money. And since refinancing can get you a better, lower interest rate, it’s a very financially savvy perk for anyone who refinances.
Lowering your mortgage interest rate can save you thousands of dollars. When you refinance and get a lower interest rate, you could save approximately $3,000 every year on your mortgage payments. Even a 1 or 2 percent change makes a huge difference in how much you’re paying.
And when you lock in a lower interest rate, you could potentially lower the amount you’re paying monthly. If a lot of your payment is going towards interest, a new rate will lower your monthly bills. This will also help you build equity faster, as you’ll be paying more towards the principal.
Here’s another perk that’s directly tied to your interest rate: you can change how much, and how often, your interest rate changes when you refinance your mortgage.
When you got your initial mortgage, you may have ended up with an adjustable rate mortgage (ARM). These home loans typically offer lower interest rates and lower monthly payments for the first few years of the loan – for example, you could lock in a 4 percent interest rate for 5 years. After that introductory period ends, your interest rate and monthly payment both increase.
And that means that you’ve likely been paying higher and higher mortgage bills for years. Homeowners with ARMs typically see their interest rates increase by as much as 2 percent annually. This leaves you paying ever-increasing costs on your mortgage.
However, when you refinance, you can get rid of your ARM for good. You can replace it with a fixed-rate mortgage, which is a loan that’s locked in and never changes. Fixed-rate mortgages offer new loan terms, a new interest rate, and a new monthly payment amount. They’re more secure because they don’t change – and this can save you a ton of money over the loan’s lifetime.
While the average mortgage lasts for 30 years, many mortgages wind up being paid for much longer. But what you likely don’t realize is that you’ll save money on a shorter-term loan – the less time you’re paying off the loan, the less you’ll pay in interest.
And if your current mortgage has a long lifetime, you can refinance and shorten it. You can completely change your loan term by refinancing, since you’ll be getting an entirely new loan. That can ultimately save you tens of thousands of dollars in interest payments.
If you refinance and reduce your mortgage’s term, you’ll slash your costs. Taking just 10 years off the loan results in more cash in your pocket. And the shorter it is, the bigger the savings. For example, if you refinance a $200,000 30-year mortgage into a new 15-year mortgage for the same amount, you could save as much as $100,000.
Do Your Research Before You Refinance
Are you ready to reap the benefits of mortgage refinancing? A financially sound choice, refinancing can secure a lower interest rate and big savings over the course of the loan’s lifetime.
But before you decide to refinance with just any lender, it’s important to shop around. You don’t want to make a big financial decision like this without doing your due diligence. Search for the best mortgage refinancing lenders and compare what they can offer you. Check out their interest rates, their loan terms, and how much money you could potentially save.
Remember, refinancing your mortgage can – and should – pay off for you. This process should make your mortgage better for you, above all else.